Devon Energy Corp., headquartered in Oklahoma City, is a major player in the oil and gas industry with an enterprise value near $40 billion. Devon has grown to become one of the nation’s largest independent oil and natural gas producers following a series of acquisitions of other independents such as Hondo Oil & Gas, Kerr-McGee’s North American onshore oil and gas properties, Northstar Energy Corp., PennzEnergy, Anderson Exploration Ltd., Mitchell Energy & Development Corp. and Chief Holdings LLC. The company focuses on onshore development primarily in the U.S. Southwest and the Athabasca oil sands in northeast Alberta, producing 168.3 Mbpd of oil and 1.6 Bcf/d of natural gas in 2013.
Dallas-based Crosstex Energy began operations in 1996 as a midstream oil and gas company focused on natural gas transportation with pipeline systems in Texas, Louisiana and the Ohio River Valley. As the shale boom has evolved, so has the midstream sector and in particular, Crosstex Energy. What was once a natural gas pipeline operator is now involved in natural gas liquids transportation, gas gathering and processing, and crude oil transportation.
As leaders in their respective business segments and geographical neighbors, it was no surprise that they would begin working with each other starting in 2006, just as the shale boom was in its infancy stage. Combining their complementary interests worked out so well that it ultimately led to Devon deciding to forego its own plans for a midstream offshoot and instead take advantage of Crosstex’s proven expertise. Of course, human relationships are the essential ingredient in establishing a workable partnership. The result is EnLink Midstream.
Headquartered in Dallas, EnLink Midstream employs over 1,200 people and has assets in most of the nation’s major production basins. Brad Iles is senior vice president of Business Development for EnLink Midstream, coming from Crosstex where he worked for 10 years managing various functional departments including corporate development, business development and engineering.
Most recently, Iles served as vice president of Business Development for the Gas Gathering, Processing and Transmission business at Crosstex. In this interview with Pipeline & Gas Journal, Iles takes time from his fast-paced schedule to discuss the new company’s strategy. Time is of the essence for Iles. In recent months, this is how the company has grown:
• It has acquired three key Gulf Coast pipeline systems: the Bridgeline System with 985 miles of natural gas pipelines in southern Louisiana with a total system capacity of 920,000 MMcf/d, the Sabine System with 150 miles of natural gas pipelines in Texas and southern Louisiana with a total capacity of 235,000 MMcf/d and the Chandeleur System with 215 miles of offshore Mississippi and Alabama pipelines with a total capacity of 330,000 MMcf/d;
• It completed Phase II of the Cajun-Sibon NGL Expansion Project that connects the company’s Eunice fractionator in South Louisiana to Mt. Belvieu supply pipelines in East Texas and has a total capacity of 120,000 bpd of raw-make NGL, and the Bearkat Processing Complex and Gathering System with a 60 MMcf/d natural gas processing plant in Glasscock County, known as Bearkat, and 30 miles of high pressure gas gathering pipelines; and
• It plans to build the Ajax 120 MMcf/d natural gas processing plant with multiple low pressure gathering pipelines and a 23-mile high pressure gathering pipeline that will tie into the Bearkat gas gathering system, and a 45-mile, 8-inch condensate pipeline and six natural gas compression and condensate stabilization facilities in the Ohio River Valley that will service major producer customers in the growing Utica Shale.
P&GJ: What’s the history of EnLink Midstream? How and why was it put together and who were the people that made it happen?
Iles: Crosstex and Devon have a deep, long-standing commercial relationship dating back to 2006 when they partnered on the acquisition of Chief Oil and Gas’ Barnett Shale assets, with Devon acquiring the exploration and production (E&P) assets and Crosstex acquiring the midstream operations. At that time, Devon became a major customer of Crosstex, and is now the largest customer of EnLink Midstream.
The Chief acquisition reinforced our strategic relationship and midstream service offerings for Devon’s upstream operations in those areas. This was the first time that the two companies discussed the possibility of combining Devon’s midstream assets into Crosstex’s portfolio.
P&GJ: What particular strengths does each partner bring to the new company and how does this help each?
Iles: Devon and Crosstex are both “best-in-class” companies with “best-in-class” employees. Through this combination, we created a more strategic asset base, a stronger balance sheet with more financial flexibility and a solid team with similar core values. With the combination of Devon’s and Crosstex’s extensive midstream systems, including gathering and transportation pipelines, and processing, fractionation and logistics assets, EnLink Midstream is one of the industry’s most formidable midstream companies.
The formation of EnLink Midstream has resulted in significant positive changes for the company by creating a more geographically diverse portfolio of midstream assets that provides a broad range of services to our customers and allows us to take advantage of operational synergies within our systems.
P&GJ: What is the mix of liquids vs. natural gas and which do you see as the most promising prospects for growth?
Iles: After completion of our Cajun Sibon NGL expansion project, about 75% of our margins will be derived from liquids-driven services and we expect the percentage of liquids-driven margins to increase in the future due to a backlog of other liquids-oriented growth projects.
However, EnLink Midstream is well-positioned to secure and execute sizable organic development and acquisition opportunities across the entire midstream value chain. We will continue to take advantage of the opportunities from our growing asset base, increased financial capacity, and Devon’s unique sponsorship.
P&GJ: Where are the assets located, and can you describe them?
Iles: EnLink Midstream has assets located in many of North America’s premier oil and gas regions, including the Barnett Shale, Permian Basin, Cana-Woodford Shale, Arkoma-Woodford Shale, Eagle Ford Shale, Haynesville Shale, Gulf Coast region, Utica Shale and Marcellus Shale. These assets include approximately 7,400 miles of gathering and transportation pipelines, 13 processing plants with 3.4 Bcf/d of net processing capacity, seven fractionators with 252,000 bpd of net fractionation capacity, as well as barge and rail terminals, product storage facilities, brine disposal wells, an extensive crude oil trucking fleet and equity investments in certain private midstream companies.
P&GJ: What is your strategy for growing the business, both short-term and long-term?
Iles: Recently we’ve laid out four avenues of growth for the company with the goal of doubling in size over the next few years. These avenues include drop-downs, growing with Devon to support their E&P activity, organic development both around our existing assets and into new basins, and merger and acquisitions (M&A) activity.
We will take advantage of drop-downs from Devon into EnLink’s general partner and from the general partner into the master limited partnership. These potential opportunities include our general partner’s interest in the legacy Devon midstream assets, Devon’s Victoria Express pipeline in the Eagle Ford, Devon’s Access pipeline in Canada, as well as the natural gas compression and condensate stabilization assets our general partner owns in the Utica.
To support Devon, we recently announced the Ajax processing facility in West Texas, which increases our natural gas gathering and processing capabilities in the Permian Basin. This growth project capitalizes on our strategic relationship with Devon. We believe there will be other opportunities in areas where Devon is growing their production, including the Eagle Ford, Permian, and Oklahoma, as well as new basins.
We are also looking at expansions around our existing assets and organic growth projects that will provide important opportunities for EnLink Midstream. We recently announced a joint venture with Marathon Petroleum Corp. to construct an NGL pipeline extension from our existing Riverside fractionation and terminal complex in Geismar, LA to Marathon’s Garyville refinery on the Mississippi River. This project represents the next phase of growth from our Cajun-Sibon expansion project.
And finally, we hope to be active in the M&A market, focusing our efforts on opportunities that are complementary to our core businesses and pursuing larger scale opportunities to enter new basins, products or service lines.
P&GJ: Are there any new pipelines or other infrastructure underway now or in the near future? Where do you envision building more infrastructure?
Iles: As I mentioned, we recently announced a bolt-on pipeline to the Cajun Sibon system which is a 50/50 joint venture with Marathon Petroleum that will connect our existing fractionator at Riverside to Marathon’s refinery in Garyville, LA. We are excited about the additional connectivity this project creates. We are equally excited about our relationship with such an important customer as Marathon.
In the Permian Basin, we have finished constructing 30 miles of gathering pipelines, five compressor stations, as well as a 60 MMcf/d gas processing plant. We have also announced a 120 MMcf/d processing plant, multiple low-pressure gathering pipelines and a 23 mile, 12-inch high pressure gathering pipeline that will be strategically located near our existing assets in the Permian Basin, which is expected to be operational in the second half of 2015. Upon completion of these projects, our total operated processing capacity in the Permian Basin will increase to approximately 240 MMcf/d.
And in the Utica Shale in Ohio, we plan to build a 45-mile, 8-inch condensate pipeline with 50,000 bpd capacity and six natural gas compression and condensate stabilization facilities with combined capacities of 560 MMcf/d and 41,500 bpd.
In the future, we continue to see tremendous infrastructure needs in the areas where EnLink Midstream operates. Many of these have been producing for years, but with the application of new technology and favorable commodity pricing, drilling continues to ramp up, placing an even greater strain on the existing infrastructure.
P&GJ: What kind of programs and procedures does EnLink Midstream have in place to promote workforce safety?
Iles: EnLink Midstream invests substantial human and financial resources in our systems’ integrity and the safety of our employees and the general public. We follow very strict regulations and standards to ensure pipeline safety. Safety is part of our everyday way of thinking and it’s equally as important as any other metrics we use to measure our business.
Through our public awareness programs, we communicate with communities along our pipeline routes and near our facilities to help educate and inform various stakeholders about our operations. We also work with local emergency responders and conduct emergency response drills to train them in the event of an emergency.
For our employees, contractors and others who visit our facilities, we have developed an extensive safety training program. In addition, we have a very robust and comprehensive process safety management program. We undertake extensive risk analysis to identify and address risks.
P&GJ: EnLink Midstream offers employee volunteerism and financial contributions to organizations such as the Ronald McDonald House, Chez Hope and the Nationwide Children’s Hospital. What is the company’s involvement with community service?
Iles: EnLink Midstream is active in contributing to the growth and success of the communities where we work. We try to empower our employees to support worthy causes through volunteer initiatives and community partnerships. Our recent community involvement initiatives have included partnerships with local food banks, homeless and domestic violence support groups, children’s hospitals, volunteer fire departments and many other social and community service organizations. Giving back to the communities where we operate is a big part of how we do business.
P&GJ: Since you began your career with Crosstex in 2004, did you ever imagine the direction the industry would take 10 years later?
Iles: No way. At the time, all I knew was that I had joined an exciting company with tremendous growth opportunities ahead. But now with the benefit of hindsight, I couldn’t have moved into the midstream industry at a more perfect time. The addition of horizontal drilling and improvements in completion techniques has revolutionized the industry. It’s truly an exciting time to be in this business.
P&GJ: As senior VP of Business Development, in addition to being responsible for EnLink Midstream’s overall business strategy, what do you consider the most important parts of your job, and how do you plan to determine how successful you’ve been?
Iles: Outside of my responsibilities to grow the business, I enjoy developing the talent of those around me. During my 10-year tenure at Crosstex and now EnLink Midstream, I’ve had the pleasure of working and leading in a variety of departments, including engineering, corporate development and business development. This “cross-training” gives me a unique perspective to help mentor and develop others.
P&GJ: How did you get into the petroleum business?
Iles: Being from Southeast Texas, I certainly grew up around the business. I graduated from Texas A&M with a degree in chemical engineering and was looking for an industry that allowed me to use my technical skills and entrepreneurial spirit. Fortunately, the midstream industry has turned out to be a great fit for me.
Analyst: Devon Moves To Highlight Its Value
Ethan Bellamy, senior analyst at Robert W. Baird & Co., offered P&GJ readers some financial insight on the Devon-Crosstex merger, which he considered surprising, though certainly a “win-win” move for both entities.
P&GJ: What is your perspective of the Devon-Crosstex merger that created EnLink Midstream?
Bellamy: Devon initially made plans to carve out its midstream assets in 2013 through an MLP IPO, but instead teamed up to form a new midstream entity with Crosstex, which was a long-time midstream provider to Devon in the Barnett Shale. The move was completely unexpected by both us and the market, particularly because of how far down the road Devon was in the midstream IPO process. The underlying rationale for the move: Entities which have qualifying income, such as E&P firms, utilities or other c- C corporations with midstream assets, have a strong fiduciary incentive to highlight that value in for their shareholders. Isolating those assets in an MLP is clearly one way to do that.
P&GJ: What did each have to contribute to the new company and why was it beneficial to each company?
Bellamy: Devon contributed a majority of their midstream assets (roughly $4.8 billion in assets) and $100 million in cash into EnLink Midstream in exchange for controlling interest in both the general partner and limited partner, and more importantly, the incentive distribution rights. From a Crosstex perspective, the transaction boosted fee-based activities at the pro-forma entity to over 95%, diversified and expanded the footprint, moved Crosstex to investment-grade quality overnight, built transparent growth through drop-downs, and provided an enhanced relationship with a strong, well-regarded E&P.
From a Devon perspective, Devon effectively monetized its midstream assets at an attractive price (~11x earnings before interest, tax, depreciation and amortization (EBITDA) and doesn’t need to worry about managing another public equity security. Additionally, handing over midstream assets to a team purely focused on midstream operations allows for additional synergistic opportunities, particularly with other E&Ps. The clear-cut monetary and human capital separation between upstream and midstream activities is a win-win for both entities.
P&GJ: What do you see as their short-term and long-term strategies?
Bellamy: EnLink Midstream will grow through a combination of organic growth projects (with and without Devon), drop-downs from both ENLC and Devon, and third-party acquisitions. The long-term strategy of every MLP is to grow distributions to unit holders and to do it in a way that increases the security of distributions. Since the best tax strategy for an MLP unit holder is to hold the position into the great beyond and let your heirs take over, ideally you would want to see an MLP build a strong economic moat in areas that will require multi-decade investments.
For Devon, they are shedding conventional E&P assets and midstream assets in order to steer their capital budget toward high rate of return unconventional development. The partnership with Crosstex allowed them to immediately boost net asset value and simultaneously to retain upside from midstream development longer term.
P&GJ: What types of market assets will they be attempting to acquire or dispose of?
Bellamy: On the previous earnings call, management noted that despite $5 billion in organic and drop down growth opportunities, they intend to remain very active in the M&A market. Likely acquisitions would be bolt-on complementary assets to the existing footprint or major acquisitions in new regions to support Devon. The important point here is that pro-forma for the Devon-Crosstex merger, the Enlink cost of capital significantly compressed, making them much more competitive in any form of capital deployment.
P&GJ: What do you see as the challenges in combining two independent companies such as these, one being a very large independent E&P company, the other a growing force in the midstream pipeline sector?
Bellamy: Merging two companies often creates clash-of-culture issues, which is one of the reasons that we and the market liked this deal so much. At multiple levels of the respective firms, Devon had been a Crosstex customer for years, so there were already-established relationships in place that should smooth the transition and mitigate those potential problems. Still, in a merger, somebody’s fiefdom always gets disrupted, so we wouldn’t look for perfection. Certainly the share and unit price appreciation across the prior equity holder bases helps to offset any sour grapes that might arise.
Lastly, we haven’t seen any reticence on the part of other E&Ps to use Enlink Midstream even though it is aligned with and controlled by a potential E&P competitor. However, that could be an issue at some point for some producers. Only time will tell. We think E&Ps are more likely to go with whoever can give them the highest up-time and the highest netbacks, regardless of ownership.
By Kate Permenter, Pipeline News Editor